Selling RSUs that issued special stock dividend

[Jordan1997]

Inputting sales of company RSUs seem very straightforward in TurboTax. However, inputting sales of RSUs that issued special stock dividend (and sales of that dividend) is not straightforward at all. I assume this is because this is a very rare circumstance. However, this is what happened when Dell Technologies spun off VMware and gave out a special dividend of VMware shares. Now I need guidance how this should get inputted into TurboTax.

Let me review the situation (making up share & price numbers for simplicity):

2020 - Vested 100 shares of DELL at $100/share. Sold-to-cover (taxes) 20 shares at $100/share. 80 shares remaining ($8000 total value).

2021 - Dell spins off VMware and gives out special VMW dividend at 0.5 ratio. Therefore 40 VMW shares received at $100/share. DELL shares automatically adjust to $50/share due to dividend. Still have 80 shares of DELL. Total value of DELL and VMW shares combined still $8000 total value.

2022 - Sell all 40 VMW shares at $110/share and all 80 Dell shares at $55/share. Total amount is $8800. Therefore long term gains is $800 at point of vesting & selling to cover.

To me this is straightforward. I get taxed on the $800.

But now the question becomes... How do I get this into TurboTax? The software forms asks for the DELL price, shares, and amount sold at time of vesting & selling to cover. Except things have adjusted since the dividend. It also asks the same for VMW -- which I never actually received as a vesting, but rather as a post-vesting special dividend.

[GeorgeM777]

The Dell RSUs should be entered into TurboTax in the same manner as any other RSU, and it appears you have already begun that process.  The VMWare special stock dividend requires a different approach.  In November 2021, VMWare issued a Special Dividend Logistics FAQ which included, among other things, the following information about the special stock dividend:

VMware currently estimates that, for federal tax purposes, 39.49% of the Special Dividend will be treated as a taxable dividend, with the other 60.51% of the Special Dividend being first treated as a return on capital to stockholders to the extent of their basis in VMware common stock, and thereafter as capital gain...

The taxable dividend may be eligible for treatment as a qualified dividend for federal tax purposes depending on the holding period of the underlying stock and other personal tax matters. The precise tax impact of the Special Dividend to specific stockholders depends upon the stockholder’s individual tax situation.

Based on the above information, do not treat the special stock dividend the same way you would handle an RSU.  At least part of your special stock dividend should be entered into TurboTax in the section reserved for dividends.  A portion of your special stock dividend may be a return of your capital, and the remaining part will be capital gain.  The capital gain amount, if any, is entered into TurboTax in the same section of TurboTax where you enter your Dell RSUs; however, it should be entered the same way as any stock sale that results in a capital gain.

Here is a link to the VMWare FAQ referenced above.

VMWare Special Dividend Logistics FAQ

@Jordan1997

[Jordan1997]

Hi @GeorgeM777, thank you for taking the time to respond to my post!

To be clear though, VWMare also issued their own special dividend at the same time to VMW shareholders.

The spin-off event in totality generated two dividend events:

1. Existing DELL shareholders -> keep DELL shares + distribute VMW shares
2. Existing VMW shareholders -> keep VMW shares + distribute special cash dividend

I believe the post you're referencing below is regarding event #2 (the special dividend issued to existing VMW holders who got a special cash dividend). My original post was more in reference to event #1.

Its a super confusing situation for sure...

[GeorgeM777]

Thank you for that clarification.  In December 2021, Dell Technologies prepared and filed Form 8937, Report of Organizational Actions Affecting Basis of Securities, a link to this form is below.  Page 2 of Form 8937 indicates the following regarding basis for shareholders of Dell stock and VMware stock:

...Dell Technologies shareholders must allocate their aggregate tax basis in their Dell Technologies Common Stock held immediately before the Distribution among (i) the VMware Class A Stock (including any fractional share interest for which cash was received), (ii) the VMware Class B Stock (including any fractional share interest deemed received), and (ii) the Dell Technologies Common Stock in respect of which such VMware Common Stock was received in proportion to the relative fair market value of each after the Distribution. 

The Attachment to Form 8917 also indicates that there is no one way to calculate basis in matters of this type.  However, Dell does provide, in their opinion, a reasonable calculation method.  That calculation method is on page 2, paragraph 1 of the Attachment.  

After calculating the basis for your Dell shares and your VMware shares, we recommend that you enter the Dell shares as you have already begun, namely, in the section of TurboTax that relates to RSUs.  Because the VMware shares were not acquired directly as RSUs, those can be entered into TurboTax in the same way as the sale of stock.  

Form 8937 with Attachment

@Jordan1997

[Jordan1997]

Thank you for this.